Futu Holdings Stock: Mixed Results (NASDAQ:FUTU)

Elevator Pitch

My ranking for Futu Holdings Restricted (NASDAQ:FUTU) shares is a Maintain.

I beforehand touched on the regulatory developments related to FUTU’s enterprise operations in my prior March 9, 2023 replace. On this newest article, my focus is on the evaluation of Futu Holdings’ monetary outcomes for the third quarter of this 12 months.

FUTU’s Q3 2023 efficiency was blended as the corporate delivered a income beat and an earnings miss. Futu Holdings’ efforts to develop outdoors of Mainland China have paid off with a rise within the variety of paying shoppers, however FUTU paid the worth within the type of greater Normal & Administrative prices. Additionally, FUTU appears to be pretty valued, making an allowance for the truth that the corporate did not spend a lot on share repurchases in Q3. Due to this fact, I retain my Maintain ranking for Futu Holdings.

The Market’s Expectations Of FUTU’s Q3 Efficiency

Earlier than Futu Holdings revealed its precise Q3 2023 monetary efficiency on Thursday, November 23 morning, the analysts have been anticipating that the corporate will proceed to ship constructive income and earnings development for the third quarter, albeit at a extra average tempo.

By way of the highest line, the promote aspect projected that FUTU’s income will enhance from HK$1,945.6 million for the third quarter of 2022 to HK$2,308.1 million (supply: S&P Capital IQ) in the newest quarter. Whereas the market’s expectations of a +19% YoY prime line enlargement for Q3 2023 is fairly good, this shall be inferior to Futu Holdings’ Q1 2023 and Q2 2023 income development charges of +52% YoY and +42% YoY, respectively. Additionally, the consensus Q3 income forecast of HK$2,308.1 million implies a -7% QoQ contraction for the most recent quarter.

On the subject of the underside line, the consensus numbers pointed to an anticipated +50% YoY bounce in Futu Holdings’ normalized internet revenue to $1,212.0 million for the third quarter of the present 12 months. However this additionally means that FUTU will witness backside line development deceleration on YoY phrases for the most recent quarter. As a comparability, the corporate achieved higher YoY income enlargement charges of +104% for Q1 2023 and +73% for Q2 2023. The HK$1,212.0 million third quarter internet revenue estimate additionally interprets right into a modest +2% QoQ backside line enhance.

Within the subsequent part, I consider how FUTU carried out relative to expectations.

Combined Third Quarter Outcomes With Income Beat And Earnings Miss

FUTU’s precise Q3 2023 monetary outcomes have been blended. The corporate recorded a formidable +15% prime line beat, however its non-GAAP adjusted earnings fell wanting the sell-side analysts’ expectations by -5%.

Futu Holdings’ income rose by +36% YoY to HK$2,650.4 million in Q3 2023, which was significantly better than the consensus prime line enlargement forecast of +19% YoY. However FUTU’s most up-to-date quarterly income development was nonetheless weaker than its prime line enlargement for Q1 2023 (+104%) and Q2 2023 (+73%).

The rising charge atmosphere was an important driver of FUTU’s above-expectations prime line within the newest quarter. The corporate’s curiosity earnings surged by +71% YoY to HK$1,504.5 million for the third quarter of 2023, which it attributed to “greater curiosity earnings from financial institution deposits and securities borrowing and lending enterprise” in its quarterly outcomes press launch. In distinction, Futu Holdings’ brokerage fee and dealing with cost earnings elevated by simply +5% YoY to HK$1,008.9 million for the most recent quarter.

However Futu Holdings’ Q3 2023 backside line wasn’t pretty much as good as what the analysts predicted. Normalized internet earnings for FUTU grew by +44% YoY to HK$1,158.0 million within the third quarter of this 12 months. As a comparability, the market was anticipating a stronger +50% earnings development in the newest quarter.

FUTU’s Q3 earnings miss was the results of lower-than-expected gross revenue margin and higher-than-expected Normal & Administrative or G&A prices.

The corporate’s gross revenue margin contracted by -5.3 share factors from 88.8% for Q3 2022 to 83.5% in Q3 2023, and this was decrease than the consensus gross margin estimate of 86.2% (supply: S&P Capital IQ). Rising rates of interest boosted Futu Holdings’ income, however greater charges harm its gross margin. FUTU’s curiosity bills went up by +546% YoY to HK$288.7 million for Q3 2023, and this explains why Futu Holdings registered below-expectation gross margin. Notice that curiosity expense is acknowledged as a value of income merchandise for FUTU.

Individually, G&A prices for Futu Holdings rose by +52% YoY to HK$321.7 million within the third quarter of the present 12 months. In its Q3 2023 outcomes press launch, the corporate revealed that it noticed “a rise normally and administrative personnel to assist abroad enlargement.” For the newest quarter, the +52% YoY development in G&A prices was a lot greater than FUTU’s +36% YoY income enlargement.

Worldwide Growth Efforts Got here At A Worth

Within the newest quarter, FUTU has put in plenty of effort to develop the corporate’s presence in markets outdoors Mainland China as disclosed in its third quarter earnings press launch.

Futu Holdings arrange the corporate’s maiden bodily store in Hong Kong in July. For the Singapore market, FUTU got here up with new wealth administration merchandise for the third quarter of the 12 months. In September 2023, Futu Holdings began signing up new prospects in Canada and Japan.

Specifically, the Japanese market would possibly change into a significant development driver for FUTU sooner or later. Inventory brokerage agency China Renaissance Securities revealed a analysis report (not publicly out there) titled “Sturdy Lively Consumer Development In Japan” on October 10, 2023. On this report, China Renaissance Securities estimated that FUTU has the potential to “purchase not less than 15,000 new paying shoppers in Japan in 4Q23.”

For Q3 2023, Futu Holdings added a good 65,000 new paying prospects to its shopper base, which signifies that its international markets enlargement plans are working effectively. Nonetheless, the rise in new paying shoppers comes at a worth. As I discussed within the earlier quarter, FUTU’s G&A bills jumped by +52% YoY and this performed an enormous half within the firm’s earnings miss for the latest quarter.

Restricted Share Repurchases For Q3 Would possibly Counsel That Inventory Is Pretty Valued

Earlier in March 2022, FUTU had disclosed a $500 million new share buyback plan that can expire on the finish of 2023.

Futu Holdings spent a complete of $365 million on share repurchases between March 2022 and end-Q3 2023, which means that it has solely executed on roughly 73% of the utmost buybacks that it might have completed with the present share repurchase program. This additionally implies that FUTU is much less prone to full the prevailing $0.5 billion share buyback plan, because the 12 months is coming to an in depth quickly.

Within the third quarter of 2023, FUTU had allotted a mere $5 million to share buybacks. This was calculated by evaluating Futu Holdings’ cumulative share buybacks of $360 million and $365 million on the finish of Q2 2023 and Q3 2023, respectively.

Futu Holdings’ share worth went up by +45% from $39.74 as of June 30, 2023 to $57.81 on the finish of the September 30, 2023 buying and selling day. Throughout this time interval, FUTU’s consensus ahead subsequent twelve months’ normalized P/E expanded from 10.1 instances to 13.8 instances as per S&P Capital IQ knowledge. The numerous inventory worth rise and the significant valuation a number of re-rating for FUTU might clarify why Futu Holdings did not allocate a lot capital to share buybacks for the most recent quarter,

Based mostly on Futu Holdings’ final traded share worth of $59.38 as of November 22, 2023, the market values Futu Holdings at a consensus ahead subsequent twelve months’ P/E ratio of 13.9 instances as per S&P Capital IQ knowledge. For my part, FUTU is not undervalued based mostly on a comparability of its mid-teens P/E metric with the corporate’s consensus FY 2024-2025 normalized EPS (in Hong Kong {dollars}) CAGR on the high-single digit share degree, or 8.6% (supply: S&P Capital IQ) to be actual.

Closing Ideas

FUTU’s blended set of outcomes for Q3 would not supply many causes to improve the inventory’s ranking, so I select to keep up a Maintain for Futu Holdings. The corporate remains to be in enlargement mode, so investments regarding worldwide enlargement are anticipated to be a drag on its backside line. As well as, FUTU seems to be buying and selling at a good valuation judging by the restricted share buybacks completed in Q3.